Easing oil pressure fails to halt Canadian Dollar gains

Despite pressure on oil and the Canadian Dollar as Middle East tensions eased, USD/CAD declined.
Reduced demand for safe-haven assets weighs on the US Dollar as Middle East tensions subside.
Robust US GDP and labour figures cushion the USD against steeper losses as the probability of a Fed hike declines.

USD/CAD trades around 1.3970 in Friday’s Asian session. The pair is declining for a third consecutive day, even as fresh diplomatic initiatives in the Middle East relieve pressure on oil markets and weigh on the commodity-linked Canadian Dollar (CAD).

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Following a Wall Street Journal report on renewed diplomatic contact, crude oil prices remained stable. The report revealed that US Vice President JD Vance contacted Mohsen Rezaei, Secretary of Iran's Supreme National Security Council, on Wednesday to try to revive peace negotiations. Confirming that he had authorised Vance’s approach, US President Donald Trump also said Iran requires help with medical supplies and other essential resources.

Hopes for US-led diplomatic peace negotiations are reducing demand for safe-haven assets, putting the US Dollar (USD) under pressure. With Middle East tensions easing, concerns over oil supplies and inflation have receded, curbing expectations of a Federal Reserve (Fed) interest rate increase at its December meeting. Markets now assign a nearly 75% probability to a 25-basis-point hike, compared with 84.2% a day earlier.

Recent US economic releases, however, point to sustained resilience and have boosted bets on a Fed rate increase. Supported by strong consumer spending growth of 3.8% YoY, preliminary Gross Domestic Product came in at 3.4% YoY, above the 3.2% forecast and Q2’s 2.2% reading. The Core PCE Price Index, the Fed’s preferred inflation gauge, increased 3.1% YoY, matching expectations. Meanwhile, initial jobless claims edged down to 194K, adding to evidence of a heating economy and a tight labour market.

Technical outlook: USD/CAD bearish below key EMAs

At 1.3970 on the daily chart, USD/CAD retains a bearish short-term bias below both the nine- and 50-day Exponential Moving Averages (EMAs). A pullback from recent highs has left the pair beneath this cluster of short- and medium-term averages, indicating limited upside for now. At 36, the 14-day Relative Strength Index (RSI) signals subdued momentum rather than outright oversold conditions.

The nine-day EMA at 1.4027 provides the nearest resistance, ahead of the fifty-day EMA at 1.4057. Beyond these, the horizontal level around 1.4300 represents a more substantial hurdle. Initial downside support lies at the horizontal floor of 1.3732, followed by a deeper structural level at 1.3482. Should the decline continue, buyers would be expected to show greater interest at that lower level.

Chart Analysis USD/CAD — USD/CAD: Daily price chart

BoC hike: Modestly hawkish tone lifts rate expectations

The tone of the Bank of Canada’s mid-week decision mattered alongside the move itself, according to strategists at Scotiabank. They describe Wednesday’s BoC hike as “delivered with a modestly hawkish message” that, in their assessment, “ultimately delivered a slight boost in rate expectations across the curve,” strengthening support for the Canadian Dollar relative to its commodity peers.

(The technical analysis of this story was written with the help of an AI tool. Learn more.)

Canadian Dollar: Key questions

Which factors matter most for the Canadian Dollar?

Interest rates set by the Bank of Canada (BoC), Oil prices, economic health, inflation and the Trade Balance are the main drivers of the Canadian Dollar (CAD). Oil is Canada’s largest export, while the Trade Balance measures the difference between the value of its exports and imports. Market sentiment also matters: investors’ willingness to buy riskier assets (risk-on) tends to support the CAD, whereas a preference for safe-haven assets reflects risk-off conditions. The health of the US economy is another major influence, given that the US is Canada’s largest trading partner.

How do Bank of Canada decisions affect the Canadian Dollar?

By setting the interest rate at which banks can lend to each other, the Bank of Canada (BoC) influences borrowing rates across the economy and, in turn, the Canadian Dollar. Its primary objective is to keep inflation at 1-3%, raising or lowering interest rates as needed. Relatively high rates generally support the CAD. The Bank of Canada can also alter credit conditions through quantitative easing or tightening. Easing tends to weigh on the CAD, while tightening tends to support it.

How do Oil prices affect the Canadian Dollar?

As Canada’s largest export, petroleum makes Oil prices a major driver of the Canadian Dollar, often with an immediate effect on its value. Rising Oil prices typically lift the CAD by increasing overall demand for the currency; falling prices tend to have the reverse effect. Higher Oil prices also make a positive Trade Balance more likely, providing further support for the CAD.

What effect does inflation data have on the Canadian Dollar?

Inflation was traditionally regarded as harmful to a currency because it erodes the value of money. With cross-border capital controls relaxed in modern times, however, the relationship has actually reversed. Higher inflation typically prompts central banks to raise interest rates, drawing capital from global investors seeking attractive returns. Those inflows increase demand for the domestic currency, which in Canada is the Canadian Dollar.

How do economic releases affect the Canadian Dollar?

By providing a measure of economic health, macroeconomic releases can move the Canadian Dollar. GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys all help shape the CAD’s direction. Economic strength supports the currency by attracting foreign investment and potentially encouraging the Bank of Canada to raise interest rates. Weak economic figures, by contrast, are likely to push the CAD lower.